Thriving, Striving or Surviving

Episode Summary

Executive Summary: The episode covers a cooling but still sticky inflation picture, with headline CPI falling on cheaper energy while core inflation surprised to the downside, alongside a discussion of consumer credit that shows a bifurcated household economy. Moody’s economists see aggregate consumer finances as stable, but Equifax’s Emmeline Ayliff argues the middle is hollowing out and stress is concentrating among lower-income, lower-wealth borrowers.

Main Topics: June inflation surprise: headline CPI down, core flat (Priority: 5/5): Matt Collier walks through June CPI, emphasizing a larger-than-expected 0.4% drop in headline CPI driven by energy, and an unexpected flat core CPI reading that lowered year-over-year core inflation to 2.6%. Energy, crack spreads, and the outlook for gas prices (Priority: 5/5): The discussion explains why falling crude prices did not fully translate into cheaper gasoline, citing refinery constraints and widening crack spreads. Participants expect gas to turn inflationary again in July. PPI and PCE implications for the Fed (Priority: 4/5): The panel notes softer-than-expected PPI and projects only modest relief in the PCE deflator. Despite improved monthly readings, underlying inflation is still seen above the Fed’s target and unlikely to prompt near-term rate cuts. Vehicle prices remain softer than expected (Priority: 4/5): Mike Brisson explains that new-vehicle prices have not risen as tariffs had once suggested, while used-vehicle prices are under some downward pressure from increased supply, though wholesale price increases may eventually filter into CPI. Consumer credit: stable aggregates, concentrated stress (Priority: 5/5): Emmeline Ayliff describes a K-shaped consumer balance sheet, with a growing share of strivers and thrivers and a shrinking middle. Mike and Chris counter that aggregate delinquency and debt-service metrics still look stable. Data interpretation debate: Equifax vs New York Fed delinquency measures (Priority: 4/5): A major closing segment compares Equifax’s lender-based delinquency data with the New York Fed’s consumer-based measure, arguing the latter overstates distress by including charged-off debt that remains on consumers’ credit histories.

Key Arguments: Headline inflation eased in June because gasoline prices fell, but the decline was less dramatic than crude oil movements alone would imply because refinery capacity constraints widened crack spreads. Core CPI being flat was the bigger surprise than the headline decline, suggesting underlying inflation is still sticky but not accelerating in the near term. The most likely inflation path is headline CPI around 3.5% for the rest of the year, with core CPI/PCE closer to the mid-2% to low-3% range. The Fed is expected to hold rates steady because the data are backward-looking and current inflation is still above target, while energy markets remain the bigger near-term risk. Vehicle inflation has not reaccelerated as expected: automakers chose to protect market share rather than fully pass through tariff-related cost pressure, and used-car supply is improving. Household credit looks stable in aggregate: debt-service ratios are falling, spending remains solid, and delinquencies have plateaued at manageable levels. At the same time, consumer financial stress is increasingly concentrated among lower-income and lower-credit-score borrowers, especially in FHA mortgages and student loans. The New York Fed’s higher credit-card delinquency rate is criticized as misleading because it includes charged-off debt and uses a small sample that is less useful for real-time consumer analysis.

Data Points: Headline CPI (month-over-month): -0.4% - June CPI fell more than expected, driven mainly by energy prices. Moody’s/Collier headline CPI forecast: -0.2% - The team had expected a smaller decline in June. Retail gasoline prices: $4.50 to $4.45 per gallon - Average U.S. gasoline prices fell from May to June. Gasoline price decline: about 10% - Approximate drop in gasoline prices during the month. Food prices (monthly): +0.2% - June food inflation was mild but continued to add pressure. Food at home (monthly): +0.2% - Grocery-store food prices rose at the same pace as total food. Food at home (year-over-year): 2.7% - Grocery prices remained moderately elevated on an annual basis. Core CPI (monthly): 0.0% - Flat core CPI was the key upside surprise in the inflation report. Core CPI (year-over-year): 2.6% - Flat monthly core inflation lowered the annual rate from 2.9%. Electricity services CPI: -0.7% - One of the noisy components pulling core inflation lower. Medical care CPI: -0.1% - Small monthly decline viewed as likely noise. Hotel prices: -3% - Volatile shelter-related component that helped depress the monthly shelter reading. Headline CPI outlook: around 3.5% - Matt’s view of headline inflation for the rest of the year. Core CPI outlook: 2.5% to 2.7% - Expected underlying core inflation range. PPI final demand (monthly): -0.3% - June producer prices were softer than expected. PPI May revision: 1.1% down to 0.6% - May wholesale inflation was revised lower significantly. PCE deflator (monthly forecast): -0.1% - Expected June headline PCE reading. Core PCE (monthly forecast): +0.2% - Expected June core PCE reading. PCE deflator (year-over-year outlook): 3.7% - Estimated if the monthly forecast plays out. Core PCE outlook: about 3.0% - Expected to settle near 3% with favorable base effects. Import prices (monthly): +0.3% - Unexpected increase instead of a decline; linked partly to Chinese industrial supplies. New-vehicle tariff pass-through: did not materialize - Mike said automakers absorbed margin pressure rather than raising prices sharply. Used-vehicle supply: higher than prior years - More off-lease and newer used vehicles are entering the market. Household debt outstanding: $18.2 trillion - Emmeline referenced the total consumer debt stock in the Equifax data discussion. Pivoting middle movement: 17.9% total - Share of consumers moving between the middle and the tails over the last six quarters. Moved down: 12.6% - Portion of the pivoting middle that moved into the lower tier. Moved up: 5.3% - Portion of the pivoting middle that moved into the higher tier. Strivers population change: +11% - Growth in the lowest 20% consumer segment over six quarters. Thrivers population change: +30% - Growth in the top 10% consumer segment over six quarters. Middle population change: -6% - Net decline in the middle segment since Q3 2023. Subprime share in Dec. 2019: 26% - Share of consumers below roughly a 620 credit score before the pandemic. Subprime share currently: 19% - Smaller share of consumers now sit in subprime credit score territory. Subprime debt 90+ day delinquency rate: 10% - June delinquency rate on outstanding subprime debt across all products. Household debt growth: 1.7% year over year - Mike said total debt is growing slower than incomes. Equifax lender-based credit card delinquency rate: 2.9% - 90+ day delinquency rate from the Equifax-style lender view. New York Fed credit card delinquency rate: 13.1% - Consumer-view measure criticized as overstating distress by including charged-off debt. Retail sales (year-over-year): 6.65% - Marissa’s stats game answer referencing nominal retail spending growth. Retail sales excluding autos and gas: 5.7% - Shows spending strength even after removing volatile categories. Probability of September Fed rate hike: 53.3% - Marissa’s stats game clue based on market pricing.

Pivotal Quotes: "“The experience is divergent. It's very divergent.”" — Emmeline Ayliff: Her central characterization of consumer finances as highly uneven across income and wealth groups. "“I think at the next meeting, they're just sitting on their hands.”" — Chris Drees: His view that the Fed will hold rates steady despite the latest inflation data. "“I think it's bogus.”" — Mark Sandy: His criticism of the New York Fed delinquency measure that includes charged-off debt.

Implications: Inflation is cooling unevenly and the Fed likely stays on hold, but consumer stress is becoming more concentrated. Watch energy prices, used vehicles, and lower-score borrowers for the next turn in the cycle.